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please solve by hand A construction company is deciding if they should make a new building...

please solve by hand

A construction company is deciding if they should make a new building bronze, silver, or gold LEED-certified, or not at all. Regardless of the level of certification, this new building will generate extra annual revenues of $40,000 starting at the end of the first year due to intended business operation. In terms of operational cost, each option offers different levels of annual energy savings (can be taken as annual incomes), but also different operation and maintenance costs. Please also note that a building with no certification will have no energy savings, but energy costs. Further, the government offers different tax credits depending on the level of environmental consciousness. Please note that all annual costs and savings begin at the end of year 3 and extend until the end of the operation life. The buildings are intended to operate for 20 years, and the company has a minimum attractive rate of return (MARR) of 5%. The following data is available for each option:

Certification Initial Cost Energy Savings Annual Operation and Maintenance costs Environmental Tax Credit Salvage value
No Certification $320,000 -$13,000 $8,000 $0 $180,000
Bronze $630,000 $16,400 $13,000 $5,000 $430,000
Silver $880,000 $29,400 $21,500 $10,000 $660,000
Gold $1,040,000 $51,300 $29,500 $15,000 $750,000

Find the best alternative using incremental IRR analysis.

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Answer #1

BRONZE is BEST Alternative.

No Bronze Silver Gold
01-01-2020 -320000 -630000 -880000 -1040000
01-01-2021 40000 40000 40000 40000
01-01-2022 40000 40000 40000 40000
01-01-2023 19000 48400 57900 76800
01-01-2024 19000 48400 57900 76800
01-01-2025 19000 48400 57900 76800
01-01-2026 19000 48400 57900 76800
01-01-2027 19000 48400 57900 76800
01-01-2028 19000 48400 57900 76800
01-01-2029 19000 48400 57900 76800
01-01-2030 19000 48400 57900 76800
01-01-2031 19000 48400 57900 76800
01-01-2032 19000 48400 57900 76800
01-01-2033 19000 48400 57900 76800
01-01-2034 19000 48400 57900 76800
01-01-2035 19000 48400 57900 76800
01-01-2036 19000 48400 57900 76800
01-01-2037 19000 48400 57900 76800
01-01-2038 19000 48400 57900 76800
01-01-2039 19000 48400 57900 76800
01-01-2040 199000 478400 717900 826800
IRR 5.74655% 6.65604% 5.55109% 6.06374%
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